Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section above entitled “Cautionary Note Regarding Forward-Looking Statements and Summary Risk Factors.” Certain risk factors may cause our actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see Item 1A, “Risk Factors.”
Overview
We are an internally managed, Maryland corporation focused on acquiring retail, office and industrial real estate located in major U.S. markets. We initiated operations during the year ended December 31, 2015 and we intend to elect to be taxed as a REIT for federal income tax purposes commencing with our taxable year ending December 31, 2021.
Public Offering and Nasdaq Listing
In September 2021, the Company closed an underwritten public offering of 1,665,000 units at a price to the public of $10 per unit generating net proceeds of $13.8 million including issuance costs incurred during the years ended December 31, 2021 and 2020. Each unit consisted of one share of common stock and one warrant to purchase one share of common stock at an exercise price equal to $10 per share. The common stock and warrants included in the units (which were separated into one share of common stock and one warrant) currently trade on the Nasdaq Capital Market (“Nasdaq”) under the symbols “GIPR” and “GIPRW,” respectively.
Our Investments
The following are characteristics of our properties as of December 31, 2021 (excluding our Tenants in Common Property):
•
Creditworthy Tenants . Approximately 80% of our portfolio’s annualized rent as of December 31, 2021 (excluding our Tenant in Common property) was derived from tenants that have (or whose parent company has) an investment grade credit rating from a recognized credit rating agency of “BBB-” or better. Our largest tenants are the General Service Administration, PRA Group and Pratt & Whitney, all who have an ‘BB+’ credit rating or better from S&P Global Ratings and contributed approximately 65% of our portfolio’s annualized base rent as of December 31, 2021.
•
100% Occupied . Our portfolio is 100% leased and occupied.
•
Contractual Rent Growth . Approximately 77% of the leases in our current portfolio (based on annualized rent as of December 31, 2021) provide for increases in contractual base rent during future years of the current term or during the lease extension periods.
•
Average Effective Annual Rental per Square Foot . Average effective annual rental per square foot is $17.12. We generally depreciate all properties on a straight-line basis over a 26 – 50 year period.
Given the nature of our leases, our tenants either pay the real estate taxes directly or reimburse us for such costs. We believe all of our properties are adequately covered by insurance.
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The table below presents an overview of the nine properties in our portfolio as of December 31 , 2021, unless otherwise indicated:
Property
Type
Property
Location
Rentable
Square
Feet
Tenant(s)
S&P
Credit
Rating
(1)
Lease
Expiration
Date
Remaining
Term
(Years)
Options
(Number
x Years)
Tenant
Contractual
Rent
Escalations
Annualized
Base Rent
(2)
Annualized
Base Rent
Sq. Ft.
Base
Rent
as a % of
Total
Retail
Washington, DC
3,000
7-Eleven
Corporation
A
3/31/2026
4.2
2 x 5
Yes
$
129,804
$
43.27
3.4
%
Retail
Tampa, FL
2,200
Starbucks
BBB+
2/29/2028
6.2
4 x 5
Yes
$
182,500
$
82.95
4.8
%
Industrial
Huntsville,
AL
59,091
Pratt & Whitney
Automation, Inc.
A-
1/31/2029
7.1
2 x 5
Yes
$
684,996
$
11.59
18.1
%
Office
Norfolk,
VA
49,902
General Services Administration
of the United States of America and
AA+
9/17/2028
6.7
—
No
$
882,476
$
17.68
23.3
%
Norfolk,
VA
22,247
Maersk Line, Limited
BBB
12/31/2022
1.0
1 x 5
Yes
$
386,795
$
17.39
10.2
%
Office
Norfolk,
VA
34,847
PRA Holdings, Inc.(3)
BB+
8/31/2027
5.7
1 x 5
Yes
$
742,850
$
21.32
19.6
%
Retail
Tampa, FL
3,500
Sherwin-Williams
BBB
7/31/2028
6.6
5 x 5
Yes
$
120,750
$
34.50
3.2
%
Office
Manteo, NC
7,543
General Services Administration
of the United States of America
AA+
2/20/2029
7.1
1 x 5
Yes
$
161,346
$
21.39
4.3
%
Office
Tampa, FL
7,826
Irby Construction Company
BBB-
12/31/2024
3.0
2 x 5
Yes
$
148,200
$
18.94
3.9
%
Retail
Grand Junction, CO
30,701
BestBuy
BBB+
3/31/2027
5.2
1 x 5
Yes
$
353,061
$
11.50
9.3
%
Total
220,857
$
3,792,778
Tenancy in Common Ownership
Retail
Rockford,
IL
15,288
La-Z-Boy
Corporation
NR
10/31/2027
5.8
4 x 5
Yes
$
360,100
$
23.55
(1)
Tenant, or tenant parent, rated entity.
(2)
Annualized cash rental income in place as of December 31, 2021. Our leases do not include tenant concessions or abatements.
(3)
Tenant has the right to terminate the lease on August 31, 2024 subject to certain conditions.
Property Acquisitions Subsequent to December 31, 2021
Since December 31, 2021, we have purchased the following properties as of March 9, 2022:
•
A single tenant medical building (approximately 10,900 square feet) leased to Fresenius Medical Care (NYSE: FMS) and located in Chicago, Illinois acquired in January 2022.
•
A single tenant retail stand-alone property (approximately 2,600 square feet) located in Tampa, Florida with a corporate Starbucks Coffee (NASDAQ: SBUX) as the tenant acquired in January 2022.
•
A leasehold interest in a ground lease and corresponding assignment of a single tenant retail stand-alone property (approximately 88,700 square feet) located in Tucson, Arizona with a Kohl’s (NASDAQ: KSS) as the tenant acquired in March 2022.
Property Dispositions During 2021
On August 31, 2021 we sold our 15,100-square-foot, single tenant Walgreens in Cocoa, Florida purchased in September 2019 for total net consideration of approximately $5.2 million. The acquisition was initially funded with a Redeemable Non-Controlling Interest contribution to one of our subsidiaries of $1.2 million and by debt financing of approximately $3.4 million. We also repaid the Redeemable Non-Controlling Interest of $1.2 million and the $3.4 million debt from the sales proceeds.
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Results of Operations
Our management team’s evaluation of operating results includes an assessment of our ability to generate cash flow necessary to pay operating expenses, general and administrative expenses, debt service, and to fund dividends to our stockholders. As a result, our management team’s assessment of operating results gives less emphasis to the effects of unrealized gains and losses and other non-cash charges, such as depreciation and amortization and impairment charges, which may cause fluctuations in net income for comparable periods but have no impact on cash flows. Our management team’s evaluation of our potential for generating cash flow includes on-going assessments of our existing portfolio of properties, our non-stabilized properties, long-term sustainability of our real estate portfolio, our future operating cash flow from anticipated acquisitions, and the proceeds from the sales of our real estate assets.
In addition, our management team evaluates our portfolio and individual properties’ results of operations with a primary focus on increasing and enhancing the value, quality and quantity of properties in our real estate holdings. Our management team focuses its efforts on improving underperforming assets through re-leasing efforts, including negotiation of lease renewals and rental rates. Properties that have reached goals in occupancy and rental rates are evaluated for potential added value appreciation and, if lacking such potential, are sold with the equity reinvested in properties that have better potential without foregoing cash flow. Our ability to increase assets under management is affected by our ability to raise borrowings and/or capital, coupled with our ability to identify appropriate investments.
Our results of operations for the years ended December 31, 2021 and 2020 are not indicative of those expected in future periods, as we expect that rental income, interest expense, rental operating expense, general and administrative expense, and depreciation and amortization will significantly change in future periods as a result of growth through future acquisitions of real estate related investments.
Results of Operations For The Years Ended December 31, 2021 and 2020
Revenue
For the year ended December 31, 2021, total revenue from operations were $3,900 thousand as compared to $3,520 thousand for the year ended period ended December 31, 2020. Revenue increased approximately $380 thousand due to three additional properties generating revenue for the twelve-months ended December 31, 2021 that were purchased in February 2021, April 2021 and December 2021 as well as $45 thousand in commission revenue offset in part by the sale of a property in August 2021.
Operating Expenses
For the year ended December 31, 2021 and 2020, we incurred total expenses of $5,548 thousand and $4,865 thousand, respectively which included total general, administrative and organizational expenses (“GAO”) of $1,111 thousand for 2021 and $818 thousand for 2020. The $293 thousand increase in GAO expenses is due to increased legal fees of $139 thousand, insurance of $54 thousand, executive recruiting fees of $55 thousand, rent expense of $15 thousand, and a net increase in other expenses of $88 thousand offset in part by a decrease in audit and audit-related fees of approximately $58 thousand.
For the year ended December 31, 2021 and 2020, we incurred building expenses of $768 thousand and $711 thousand, respectively. The $57 thousand increase is primarily due to increased property insurance expense of $25 thousand, and increased maintenance costs of $30 thousand and other costs of $38 thousand offset in part by lower property asset management fees of $36 thousand.
For the year ended December 31, 2021 and 2020, we incurred depreciation and amortization expense of $1,508 thousand and $1,453 thousand, respectively. The $55 thousand increase is due to the additional properties acquired offset in part by the sale of a property in August 2021.
For the year ended December 31, 2021 and 2020, we incurred interest expense and amortization of debt issuance costs of $1,311 thousand and $1,400 thousand respectively. The $89 thousand decrease in interest expense incurred is the result of $3.4 million of loans in which the interest rates changed based on 30 day LIBOR, the payoff of a $3.4 million loan in conjunction with the sale of a property in August 2021, the interest rate reduction for the $7.8 million loan and the $4.9 million loan from 4.25% to 3.50% in March 2021, and the payoff of the $1.1 million related party loan, offset in part by interest on the debt used to acquire new properties.
For the year ended December 31, 2021 and 2020, we incurred compensation costs of $850 thousand and $483 thousand respectively. The $367 thousand increase is reflective of hiring additional personnel, an increase in stock-based compensation of $212 thousand, and bonuses of $36 thousand.
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Gain on Disposal of Property
On August 31, 2021 we sold our 15,100-square-foot property, occupied by a single tenant Walgreens, in Cocoa, Florida purchased in September 2019 for total net consideration of approximately $5.2 million and recognized a gain on the sale of $923 thousand.
Income Tax Benefit
We did not record an income tax benefit for the for the year ended December 31, 2021 or 2020 because we have been in a net loss situation since inception and have recorded a valuation allowance to offset any tax benefits generated by the operating losses.
Net Loss
For the year ended December 31, 2021 and 2020, we generated a net loss of $712 thousand and a net loss of $1,345 thousand, respectively.
Income on investment in Tenancy in Common
For the year ended December 31, 2021, our share of earnings on our investment generated income of $12 thousand as we purchased a property in 2021 in which we own 36.8% interest. The Company accounts for the property under the equity method.
Net Income Attributable to Non-controlling Interests
For the year ended December 31, 2021, we allocated net income attributable to non-controlling interest of $530 thousand as compared to $487 thousand for the year ended December 31, 2020. The increase is attributable to the distributions provided to the additional redeemable non-controlling interests that were used to finance the acquisition of properties in 2021.
Net Loss Attributable to Shareholders
For the year ended December 31, 2021 and 2020, we generated a net loss attributable to our shareholders of $1,242 thousand and $1,832 thousand, respectively.
Liquidity and Capital Resources
We require capital to fund our investment activities and operating expenses. Our capital sources may include net proceeds from offerings of our equity securities, cash flow from operations and borrowings under credit facilities. As of December 31, 2021, we had total cash (unrestricted and restricted) of approximately $10.6 million, properties with a cost basis of $44.0 million and outstanding debt of approximately $29.0 million.
In September 2021, we closed an underwritten public offering of 1,665,000 units at a price to the public of $10 per unit generating net proceeds of $13.8 million including issuance costs incurred during the years ended December 31, 2021 and 2020. On October 26, 2021, the Operating Partnership entered into a Commitment Letter with American Momentum Bank (the “Lender”) for a $25 million master commitment credit facility (the “Facility”) to be used for the acquisition of income producing real estate properties. Borrowings under the Facility will accrue interest at a variable rate equal to the Wall Street Journal Prime rate, adjusted monthly, subject to a floor interest rate of 3.25% per annum.
We currently obtain the capital required to invest in and manage a diversified portfolio of commercial net lease real estate investments and conduct our operations from the proceeds of equity offerings, debt financings, preferred minority interest obtained from third parties and from any undistributed funds from our operations. We anticipate that our current cash on hand and availability under the Facility combined with the revenue generated from investment properties and proceeds from debt arrangements will provide sufficient liquidity to meet future funding commitments for at least the next 12 months.
As of December 31, 2021 and 2020, we had total current liabilities (excluding the current portion of the acquired lease intangible liability) which consists of accounts payable, accrued expenses, insurance payable of $370 thousand and $565 thousand, respectively. As of December 31, 2021, current mortgage loan payments due within 12 months total $0.6 million. Outstanding indebtedness consisted of the following as of December 31, 2021 and 2020:
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As of
December 31,
As of
December 31,
2021
2020
Interest Rate
Maturity Date
Promissory note issued for $1,286,664 by a financial institution, interest only payments due monthly of approximately $3,800 until December 2023. Note was originally issued on January 15, 2015 and assumed and modified on November 30, 2020 and can be prepaid at any time without penalty. Secured by out Tampa Sherwin-Williams property.
3.72% fixed rate after using SWAP whereas the loan is LIBOR plus 2.75%
8/10/2028
1,286,664
1,286,664
Promissory note issued for $1,275,000 by a financial institution. Note was issued on February 4, 2021 and can be prepaid at any time without penalty. Secured by our GSA-Manteo, North Carolina property.
Wall Street Journal Prime Rate with minimum of 3.25%
2/4/2023
1,275,000
—
Promissory note issued for $850,000 by a financial institution. Note was issued on April 21, 2021 and can be prepaid at any time without penalty. Secured by our Irby - Plant City, FL property.
Wall Street Journal Prime Rate minus 0.5% with minimum of 3.0% for first 24 months; thereafter, weekly average yield on U.S. Treasury Securities adjusted to a constant maturity of three tears on April 21, 2023, plus 2.75% with a minimum of 3.25%
12/31/2024
850,000
—
Promissory note issued for $2,350,000 by a financial institution. Note was issued on December 28, 2021 and can be prepaid at any time without penalty. Secured by our Best Buy - Grand Junction, CO property.
Wall Street Journal Prime Rate with a minimum of 3.25%
12/28/2023
2,350,000
—
Promissory note issued for $8,260,000 by a financial institution, interest and principal payments due monthly of approximately $41,500. Note was issued on September 30, 2019 and can be prepaid at any time without penalty. Secured by our GSA/Maersk - Norfolk, Virginia property. The interest rate was reduced in March 2021 from 4.25% to 3.5%.
3.50%
9/30/2024
7,805,524
8,022,271
Promissory note issued for $5,216,749 by a financial institution, interest and principal payments due monthly of approximately $27,400. Note was originally issued on October 23, 2017 and modified on September 30, 2019 and can be prepaid at any time without penalty. Secured by our PRA - Norfolk, Virginia property. The interest rate was reduced in March 2021 from 4.25% to 3.5%.
3.50%
10/23/2024
4,889,670
5,041,935
Promissory note issued for $1,900,000 to a Clearlake Preferred Member, secured by all of the personal and fixture property of the Operating Partnership, interest payments due monthly. Note was issued on December 16, 2019 and was prepaid without penalty on September 30, 2021.
10.00%
12/16/2021
—
1,100,000
Promissory note issued for $11,287,500 by a financial institution, interest only payment is approximately $39,000 and starting April 6, 2021, interest and principal payments due monthly of approximately $55,000. Note was issued on February 11, 2020. Secured by our Washington, DC, Tampa, FL and Huntsville, AL properties. It cannot be prepaid without a penalty.
4.17%
3/6/2030
11,150,130
11,287,500
Promissory note issued for $3,407,391 by a financial institution. Note was issued on September 11, 2019 and prepaid without penalty upon the sale of the Walgreen-Cocoa, Florida property on August 31, 2021 which was securing the note.
30-day LIBOR adjusted monthly plus 225 basis points
9/11/2021
$
—
$
3,407,391
Less: debt issuance costs, net
(637,693
)
(689,190
)
$
28,969,295
$
29,456,571
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The Company amortized debt issuance costs during the twelve-months ended December 31, 2021 and 2020 to interest expense of $120 thousand and $135 thousand, respectively. The Company paid debt issuance costs for the year ended December 31, 2021 and 2020 of $70 thousand and $589 thousand, respectively.
As of December 31, 2021, we had three promissory notes totaling approximately $23.8 million require Debt Service Coverage Ratios (also known as “DSCR”) of 1.25:1.0, one promissory note totaling $1.3 million require DSCR of 1.20:1.0, one promissory note totaling $0.9 million require DSCR of 1.15:1.0, one promissory note totaling $1.3 million require DSCR of 1.30:1.0, and one promissory note totaling $2.4 million require DSCR of 1:50:1.0. We were in compliance with all covenants as of December 31, 2021. As of March 9, 2022, we added three new promissory notes with one totaling approximately $1.6 million requiring DSCR of 1.50:1.0, one new promissory note totaling $1.1 million with no required DSCR, and one totaling approximately $3.7 million requiring DSCR of 1.50:1.0.
As of December 31, 2021, the Company’s President has personally guaranteed the repayment of the $11.1 million due under the DC/Tampa/Huntsville loan, the $1.3 million loan secured by our Tampa Sherwin Williams property, the $0.9 million loan secured by our Irby property, the $1.3 million loan secured by our GSA Manteo NC property and the $2.4 million loan secured by our Best Buy Grand Junction, CO property. The aggregate guaranteed principal amount of these loans total approximately $16.9 million. The Company’s President has also provided a guaranty of the Borrower’s nonrecourse carveout liabilities and obligations in favor of the lender for the Norfolk, Virginia property loans (the “Bayport loans”), with an aggregate principal amount of approximately $12.7 million.
On October 26, 2021, the Operating Partnership entered into a Commitment Letter with the Lender for the $25 million Facility to be used for the acquisition of income producing real estate properties. Borrowings under the Facility will accrue interest at a variable rate equal to the Wall Street Journal Prime rate, adjusted monthly, subject to a floor interest rate of 3.25% per annum. At each loan closing under the Facility, the borrower shall pay the Lender a commitment fee equal to 0.50% of the applicable loan amount. Each loan will have an interest-only payment term for twenty-four months from the applicable loan closing date and all interest and principal outstanding shall be due and payable in full two years from the applicable loan closing date. Each loan will be secured by the real estate property acquired and the associated rental income and payment will be guaranteed by the Operating Partnership. David Sobelman, the Company’s President, will be required to execute a non-recourse guarantee in connection with each loan that is subject to standard “bad-boy” carve out provisions. Each loan agreement under the Facility will require the borrower to maintain a debt service coverage ratio of not less than 1.50 to 1.00 over the term of the loan and will contain customary affirmative covenants, negative covenants and events of default. Should any event of default occur, the loan commitments under the Facility may be terminated and any outstanding borrowings, together with accrued interest, could be declared immediately due and payable. All loans under the Facility must close by October 26, 2023. The Facility is voidable at the option of the Lender in specified circumstances, including a material adverse change in the Company’s financial condition and upon any changes in management of the Company that are unacceptable to the Lender. As of December 31, 2021, we have borrowed approximately $2.4 million under the Facility.
Minimum required principal payments on the Company’s debt as of December 31, 2021 are as follows:
As of
December 31,
2021
2022
$
580,740
2023
4,240,446
2024
12,981,450
2025
251,011
2026
261,675
2027 and beyond
11,291,666
$
29,606,988
The acquisition of the Manteo, NC property in February 2021, was funded with a Redeemable Non-Controlling Interest contribution to one of our subsidiaries of approximately $0.5 million and by debt financing of approximately $1.3 million.
The Company modified the Bayport loans in February 2021 for no fees and reduced the associated interest rate from 4.25% to 3.5%. The Company determined that the debt modification was not substantial under ASC 470-50.
The acquisition of the Plant City, FL property in April 2021, was funded with a Redeemable Non-Controlling Interest contribution to one of our subsidiaries of approximately $1.0 million and by debt financing of approximately $0.9 million.
The acquisition of the Rockford, IL Tenants in Common property in August 2021, was funded with a Redeemable Non-Controlling Interest contribution to one of our subsidiaries of $0.7 million.
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The acquisition of the Grand Junction , CO property in December 2021, was funded with debt financing of approximately $2.4 million .
The primary objective of our financing strategy is to maintain financial flexibility using retained cash flows, long-term debt and common and perpetual preferred stock to finance our growth. We intend to have a lower-leveraged portfolio over the long-term after we have acquired an initial substantial portfolio of diversified investments. During the period when we are acquiring our current portfolio, we will employ greater leverage on individual assets (that will also result in greater leverage of the current portfolio) in order to quickly build a diversified portfolio of assets.
Cash from Operations
Net cash used by operations was $174 thousand during the year ended December 31, 2021 compared with cash provided by operations of $257 thousand during the year ended December 31, 2020.
Cash from Investing Activities
For the year ended December 31, 2021 net cash used in investing activities was $3.9 million as compared to net cash used in investing activities of $273 thousand for the year ended December 31, 2020. The change is due to the purchase of $8.3 million in properties during the year offset in part by the proceeds from the sale of our Walgreen-Cocoa, Florida property for $5.2 million during the year ended December 31, 2021 versus a roofing project costing $196 thousand associated with our GSA/Maersk - Norfolk, Virginia building in the year ended December 31, 2020.
Cash from Financing Activities
Net cash generated by financing activities was $13.6 million for the year ended December 31, 2021 compared to net cash used in financing activities of $260 thousand for the year ended December 31, 2020. The change is the result of the proceeds from the sale of units in an underwritten offering of $14.4 million, issuance of redeemable non-controlling interests for $2.1 million and mortgage loan borrowings of $4.5 million, offset in part by $560 thousand of distributions paid to common shareholders and $493 thousand paid to redeemable non-controlling interests as compared to 2020 activity that includes new mortgage borrowings on three properties for $11.3 million which enabled the company to reduce outstanding debt by $10.0 million, the payment of $333 thousand of dividends to common shareholders, $589 thousand in debt issuance costs and $487 thousand distribution to redeemable non-controlling interests.
Future Rental Payment
The following table presents future minimum rental cash payments due to the Company over the next five calendar years and thereafter as of December 31, 2021:
Future
Minimum
Rent
Payments
2022
$
3,796,000
2023
3,427,000
2024
3,432,000
2025
3,296,000
2026
3,211,000
Thereafter
6,298,000
$
23,460,000
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
CRITICAL ACCOUNTING POLICIES
As a company primarily involved in owning income generating real estate assets, management considers the following accounting policies critical as they reflect our more significant judgments and estimates used in the preparation of our financial statements and
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because they are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses.
Real Estate Assets and Lease Intangibles . Land, buildings and improvements are recorded at cost, including tenant improvements and lease acquisition costs (including leasing commissions, space planning fees, and legal fees). We capitalize any expenditure that replaces, improves, or otherwise extends the economic life of an asset, while ordinary repairs and maintenance are expensed as incurred. We allocate the purchase price of acquired properties between the acquired tangible assets and liabilities (consisting of land, building, tenant improvements, land purchase options, and long-term debt) and identified intangible assets and liabilities (including the value of above-market and below-market leases, the value of in-place leases, unamortized lease origination costs and tenant relationships), based in each case on their respective fair values.
We allocate the purchase price to tangible assets of an acquired property based on the estimated fair values of those tangible assets assuming the building was vacant. Estimates of fair value for land, building and building improvements are based on many factors including, but not limited to, comparisons to other properties sold in the same geographic area and independent third party valuations. We also consider information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair values of the tangible and intangible assets and liabilities acquired.
The value allocated to acquired lease intangibles is based on management’s evaluation of the specific characteristics of each tenant’s lease. Characteristics considered by management in allocating these values include the nature and extent of the existing business relationships with the tenant, growth prospects for developing new business with the tenant, the remaining term of the lease and the tenant’s credit quality, among other factors.
The value allocable to the above-market or below-market market component of an acquired in-place lease is determined based upon the present value (using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining term, and (ii) management’s estimate of rents that would be paid using fair market rates over the remaining term of the lease.
The value of in-place leases and unamortized lease origination costs are amortized to expense over the remaining term of the respective leases, which range from less than a year to ten years. The amount allocated to acquire in-place leases is determined based on management’s assessment of lost revenue and costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased. The amount allocated to unamortized lease origination costs is determined by what we would have paid to a third party to secure a new tenant reduced by the expired term of the respective lease.
Non-GAAP Financial Measures
Our reported results are presented in accordance with GAAP. We also disclose funds from operations (FFO) and adjusted funds from operations (AFFO) both of which are non-GAAP financial measures. We believe these two non-GAAP financial measures are useful to investors because they are widely accepted industry measures used by analysts and investors to compare the operating performance of REITs.
FFO and AFFO do not represent cash generated from operating activities and are not necessarily indicative of cash available to fund cash requirements; accordingly, they should not be considered alternatives to net income as a performance measure or cash flows from operations as reported on our statement of cash flows as a liquidity measure and should be considered in addition to, and not in lieu of, GAAP financial measures.
We compute FFO in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts or NAREIT. NAREIT defines FFO as GAAP net income or loss adjusted to exclude extraordinary items (as defined by GAAP), net gain or loss from sales of depreciable real estate assets, impairment write-downs associated with depreciable real estate assets, and real estate related depreciation and amortization, including the pro rata share of such adjustments of unconsolidated subsidiaries. We then adjust FFO for amortization of deferred financing costs, non-cash stock compensation, public company consulting fees, and non-recurring litigation expenses and settlements to calculate Core Funds From Operations, or Core FFO. We use FFO and Core FFO as measures of our performance when we formulate corporate goals.
To derive AFFO, we modify the NAREIT computation of FFO to include other adjustments to GAAP net income related to non-cash revenues and expenses, such as amortization of deferred financing costs, amortization of capitalized lease incentives, and above- and below-market lease related intangibles. We then adjust AFFO for noncash stock compensation, public company consulting fees, and
43
non-recurring litigation expenses and settlements to calculate Core Adjusted Funds From Operations, or Core AFFO. We use AFFO and Core AFFO as measures of our performance when we formulate corporate goals.
FFO is used by management, investors, and analysts to facilitate meaningful comparisons of operating performance between periods and among our peers primarily because it excludes the effect of real estate depreciation and amortization and net gains on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions. We believe that AFFO is an additional useful supplemental measure for investors to consider because it will help them to better assess our operating performance without the distortions created by other non-cash revenues or expenses. FFO and AFFO may not be comparable to similarly titled measures employed by other companies. We believe that Core FFO and Core AFFO are useful measures for management and investors because they further remove the effect of noncash expenses and certain other expenses that are not directly related to real estate operations.
Because FFO excludes depreciation and amortization, gains and losses from property dispositions that are available for distribution to stockholders and extraordinary items, it provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses and interest costs, providing a perspective not immediately apparent from net income. In addition, our management team believes that FFO provides useful information to the investment community about our financial performance when compared to other REITs since FFO is generally recognized as the industry standard for reporting the operations of REITs. However, FFO should not be viewed as an alternative measure of our operating performance since it does not reflect either depreciation and amortization costs or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties which are significant economic costs and could materially impact our results from operations. Nor does it reflect distributions paid to redeemable non-controlling interests (See Note 6 of our Consolidated Financial Statements included herein).
The following tables reconcile net income (net loss), which we believe is the most comparable GAAP measure, to FFO, Core FFO, AFFO, and Core AFFO:
Twelve Months Ended Dec 31,
2021
2020
Net Loss
$
(712,433
)
$
(1,344,615
)
Gain on disposal of property
(923,178
)
-
Depreciation and amortization
1,508,340
1,452,556
Funds From Operations
(127,271
)
107,941
Amortization of deferred financing costs
120,343
134,898
Public company consulting fees
-
60,000
Non-cash stock compensation
314,122
101,645
Adjustments From Operations
434,465
296,543
Core Funds From Operations
$
307,194
$
404,484
Net Loss
$
(712,433
)
$
(1,344,615
)
Gain on disposal of property
(923,178
)
-
Depreciation and amortization
1,508,340
1,452,556
Amortization of deferred financing costs
120,343
134,898
Below-market lease related intangibles
(147,228
)
(109,496
)
Adjustments From Operation
558,277
1,477,958
Adjusted Funds From Operations
(154,156
)
133,343
Non-cash stock compensation
314,122
101,645
Public company consulting fees
-
60,000
Adjustments From Operations
314,122
161,645
Core Adjusted Funds From Operations
$
159,966
$
294,988
44
Jumpstart Our Business Startups Act (“JOBS Act”)
In April 2012, the Jumpstart Our Business Startups Act (“JOBS Act”) was enacted into law. The JOBS Act provides, among other things, exemptions for emerging growth companies from certain financial disclosure and governance requirements for up to five years.
In general, under the JOBS Act a company is an emerging growth company if its initial public offering (“IPO”) of common equity securities was effected after December 8, 2011 and the company had less than $1.07 billion of total annual gross revenues during its last completed fiscal year. We currently qualify as an emerging growth company, but will no longer qualify after the earliest of:
•
the last day of the fiscal year during which we have annual total gross revenues of $1.07 billion or more;
•
the last day of the fiscal year following the fifth anniversary of the first sale of our common equity securities in an offering registered under the Securities Act;
•
the date on which we issue more than $1 billion in non-convertible debt securities during a previous three-year period; or
•
the date on which we become a large accelerated filer, which generally is a company with a public float of at least $700 million (Exchange Act Rule 12b-2).
As an emerging growth company, we are eligible to include audited financial statements required for only two fiscal years and limited executive compensation information.
Pursuant to the relief for emerging growth companies under the JOBS Act, our independent registered public accounting firm is not required to file an attestation report on our internal controls over financial reporting and is exempt from the mandatory auditor rotation rules.
In addition, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standard. The decision by companies to “opt out” of the extended transition period for complying with new or revised accounting standards is irrevocable. We are not electing to opt out of the JOBS Act extended accounting transition period. We intend to take advantage of the extended transition period provided under the JOBS Act for complying with new or revised accounting standards.
To the extent we take advantage of the reduced disclosure requirements afforded by the JOBS Act, investors may be less likely to invest in us or may view our shares as a riskier investment than a similarly situated company that does not take advantage of these provisions.